United States: SBA Final Rule On Mentor-Protégé Programs For All Small Businesses Becomes Effective

Joseph P. Hornyak is a partner in Holland & Knight's Northern Virginia office and Sarah Curtis is an associate in Holland & Knight's Anchorage office

HIGHLIGHTS:

  • The Small Business Administration (SBA) issued a long-awaited final rule establishing a new, expanded mentor-protégé program that will allow all types of small businesses to qualify as protégés, while retaining, but slightly revising, its existing mentor-protégé program for participants in the 8(a) Business Development program.
  • The final rule became effective on Aug. 24, 2016. The SBA has stated informally that it intends to establish a separate unit within its existing Office of Business Development with the sole function of processing mentor-protégé applications under the new program. Informally, the SBA has stated that it will begin processing these new mentor-protégé applications on Oct. 1, 2016.
  • Like the current rule for 8(a) protégés, the final rule permits small business protégés and their SBA-approved mentors to form joint ventures that qualify for contracts set aside for small businesses or any other socioeconomic category for which the protégé firm qualifies. The rule thus greatly expands the pool of potential joint venture partners for large businesses seeking to compete for set-aside contracts.
  • Unlike the rule for 8(a) joint ventures, which requires SBA approval of a written joint venture agreement prior to the award of an 8(a) contract, joint venture agreements between mentors and protégés for non-8(a) joint ventures under the new rule will not require SBA approval prior to the award. Instead, they will be subject to self-certification and potential review by SBA in a formal size or status protest.
  • Small business joint ventures may no longer be "populated" with individuals intended to perform the contract; they must be unpopulated or populated only with administrative personnel.

Nearly six years after Congress first directed it to do so, the Small Business Administration (SBA) issued its final rule providing for a new mentor-protégé program that will permit all types of small businesses, not only participants in the 8(a) program, to qualify as protégé firms. The final rule was published on July 25, 2015, and became effective on Aug. 24, 2016 (30 days following publication of the final rule).

The final rule implements certain provisions in the 2010 Jobs Act (P.L. 111-240) and the 2013 National Defense Authorization Act (NDAA) (P.L. 112-239). Together, the two acts directed the SBA to develop a mentor-protégé program for its Service-Disabled Veteran-Owned (SDVO), Historically Underutilized Business Zone (HUBZone) and Women-Owned Small Businesses (WOSB) contracting programs, mirroring the pre-existing mentor-protégé program within SBA's 8(a) Business Development program.

The rule also includes several significant changes to 8(a) regulations and the 8(a) mentor-protégé program in particular. These changes will be discussed in a future article. For previous articles on these topics, including the 2010 Jobs Act and 2013 NDAA, see the links provided at the conclusion of this article.

Highlights of the New Mentor-Protégé Program

The new mentor-protégé program is set forth in a new section of the regulations – 13 CFR 125.9. In large measure, the new program follows the requirements of the pre-existing 8(a) mentor protégé program set forth at 13 CFR 124.520. The SBA also added a new 13 CFR 125.8 to provide the requirements for joint ventures between small business mentors and their protégés under the new program (re-designating the prior 125.8 through 125.30 to the new 125.11 through 125.33). Going forward, federal departments or agencies are not permitted to have their own mentor-protégé programs unless a department or agency head submits a plan to the SBA Administrator for approval. Additionally, within a year of the effective date of the final rule, a department or agency head must submit a plan to the SBA Administrator for any existing mentor-protégé program expected to continue.

The following are the key elements of the new SBA program:

Mentors

While the bulk of the final rule's requirements to be a mentor in the new mentor-protégé program remain the same as in the proposed rule, the SBA relented slightly on its proposed requirement that a mentor demonstrate that it be in good financial condition. As a result, to be eligible to serve as a mentor, an entity must demonstrate that it:

  • is capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement
  • possesses good character
  • does not appear on the federal list of debarred or suspended contractors
  • can impart value to a protégé firm due to lessons learned and practical experience gained or through its knowledge of general business operations and government contracting

These requirements apply to any entity, including those other-than-small businesses, that can show "a commitment and the ability to asses small business concerns ..." In the preamble to the final rule, the SBA also clarified mentors must be for-profit entities.

To demonstrate that it meets these requirements, a would-be mentor may provide tax returns or audited financial statements for the past three years or, if it is publicly traded, provide U.S. Securities and Exchange Commission (SEC) filings for the same period. Approved mentors will be required to recertify as to their good character and favorable financial position on an annual basis.

The final rule creates a presumption that a mentor generally will have no more than one protégé at a time. The SBA may, however, allow a mentor to add an additional protégé if it can demonstrate doing so "will not adversely affect the development of either protégé firm (e.g., the second firm may not be a competitor of the first firm)." Under no circumstances would the SBA allow a mentor to have more than three protégés at one time.

Finally, the SBA may also authorize that a small business act as both a protégé and a mentor simultaneously, but only where the entity can demonstrate that "the second relationship will not compete or otherwise conflict with the first mentor-protégé relationship." This represents an about-face from the proposed rule.

Protégés

To qualify as a protégé, a firm must be small under the size standard corresponding to its "primary North American Industry Classification System (NAICS) code" or demonstrate that it is seeking mentoring assistance in relation to its "secondary NAICS code" and qualifies as small under that standard.

In another change from the proposed rule, the final rule does not require firms to seek a formal size determination from an SBA area office, but instead will rely on self-certification of size status (as in the 8(a) program) and let the size protest procedures address such issues. In the preamble to the final rule, the SBA commented that so long as it is understood that any SBA approval of a mentor-protégé relationship does not constitute a formal size determination, then the size protest procedures will be sufficient.

The final rule permits protégé firms to have a second mentor relationship, provided that the second mentor operates primarily in an "unrelated" NAICS code or involves a different type of experience/assistance than is being provided by the first mentor. Additionally, as mentioned above, a protégé may also serve as a mentor subject to the noted restrictions.

While SBA relented on the formal size determination requirements for protégés, given the recent program integrity and antifraud provisions imposed by the 2010 Jobs Act, small businesses still should ensure that they are properly certifying as small in connection with a mentor-protégé application.

Benefits

Upon SBA approval of a mentor-protégé agreement (discussed below), the mentor and protégé would be eligible to submit offers as joint ventures on set-aside procurements for which the protégé is otherwise eligible. Additionally, as with the current 8(a) mentor-protégé program, a mentor and protégé approved under the new rule will not be deemed affiliates for size purposes simply because of the mentor-protégé agreement. The mentor-protégé relationship does not, however, create a blanket exclusion from affiliation; for example, mentors and protégés could still be found to be affiliated under the ostensible subcontractor rule. Consistent with current practice in the 8(a) program, the SBA's approval of the mentor-protégé agreement (but not necessarily the joint venture agreement) must be received before any joint venture proposal may be submitted on a set-aside contract in order to receive the exclusion from affiliation.

The final rule provides that a protégé may sell up to a 40 percent ownership interest to the mentor for the purpose of raising capital. The final rule also states that agencies may provide incentives as a part of the contract evaluation process where a mentor provides significant subcontracting work to its SBA-approved protégé.

The benefits available under the program cease, however, when the protégé is no longer small for its primary NAICS code. Here again, monitoring the primary NAICS code of the protégé – in addition to the NAICS codes of any specific procurement opportunities – will be essential.

Formal Requirements

As with the current 8(a) mentor-protégé program, an agreement formalizing the mentor-protégé relationship must be in writing and approved by the SBA Associate Administrator for Business Development (AA/BD) or his or her designee. The written agreement must include:

  • an assessment of the protégé's needs, as well as a detailed description and timeline for delivery of the assistance the mentor commits to provide
  • a description as to how the assistance will be provided to enable the protégé to meet its goals as defined in its business plan
  • identification of a single point of contact in the mentor entity that is responsible for managing and implementing the agreement
  • a statement that the mentor will provide such assistance for at least one year
  • a provision that allows either party to terminate on 30 days' notice
  • a provision that the term may not exceed three years, but may be extended for a second three years

The SBA will review the relationship annually to determine whether it should continue for another year. Provided no rescission is issued by the SBA, the relationship will continue automatically for the next year. A second agreement may be entered, either with the same mentor or with a second mentor, also limited to a three-year period, with potential extension. Any revisions or amendments to the agreement must be pre-approved by the SBA. In the event the parties make changes to the relationship in the agreement without approval, the SBA will terminate the relationship and may propose suspension or debarment for one or both parties.

As in the proposed rule, the final rule requires the protégé to file an annual report with the SBA, including the following:

  • all technical and/or management assistance provided by the mentor to the protégé
  • all loans to and/or equity investments made by the mentor in the protégé
  • all subcontracts awarded to the protégé by the mentor and the value of each subcontract
  • all federal contracts awarded to the mentor-protégé relationship as a joint venture, the value of each contract, and the percentage of work performed and percentage of revenue accruing to each party of the joint venture
  • a narrative describing the success such assistance has had in addressing the developmental needs of the protégé and addressing any problems encountered
  • the mentoring services the protégé receives by category and hours
  • certification as to whether there have been any changes in the terms of the agreement

The SBA may terminate a nonperforming mentor, which will render the mentor ineligible to serve as a mentor for two years. The SBA may also recommend a stop-work order on any joint venture contracts and, finally, the SBA may use the mentor's nonperformance as a basis for suspension or debarment.

A practical problem the SBA faced in implementing the new congressionally mandated program is that Congress did not appropriate additional funds for the SBA to process the "enormous volumes" of new mentor-protégé applications likely to be submitted. Further, unlike the 8(a) program, in which participants are assigned to a specific SBA district office for "servicing" and oversight, non-8(a) small businesses are not assigned to a specific SBA representative and generally self-certify compliance with SBA requirements. To address this concern, SBA announced in the preamble to the final rule that it intends to establish a separate unit within the existing Office of Business Development with the sole function of processing mentor-protégé applications, as well as reviewing the applications and the assistance provided under them once approved.

The SBA elected for the time being not to have "open and closed" periods for receipt of new mentor-protégé applications, but noted in the preamble to the final rule that such periods may become necessary if the SBA becomes overwhelmed with new applications. Informally, the SBA has stated that it will start accepting applications under the new program on Oct. 1, 2016.

Highlights of the Joint Venture Provisions

As mentioned, a key aspect of the new mentor-protégé program is the ability to form joint ventures. Once approved by the SBA, a mentor and protégé may form joint ventures to qualify for set-aside contracts for which the protégé is eligible. For example, if the protégé qualifies as an SDVO small business, a joint venture between that firm and its SBA-approved mentor would be eligible for a contract set aside for SDVO firms, provided the protégé meets the size standard assigned to the contract. The SBA has prescribed the terms of any such joint venture relationship that must be set forth in a written agreement. These provisions appear to be identical to those in the proposed rule. As noted in our discussion of the proposed rule, the joint venture requirements include the following provisions:

  • The protégé must be the managing venturer of the joint venture, and a protégé employee must be the project manager for the contract in question. The project manager need not be an employee of the protégé at the time the joint venture submits an offer, but there must be a signed letter of intent to become an employee if the joint venture is successful. The project manager may not, however, be an employee of the mentor and become an employee of the protégé for purposes of performance of the contract.
  • The protégé must own at least 51 percent of the joint venture ownership interests and receive a commensurate share of the profit.
  • The joint venture must perform the percentage of work on a set-aside contract required by the applicable Federal Acquisition Regulation (FAR) and SBA limitation on subcontracting rules (i.e., 50 percent for services and manufacturing contracts, and 15-25 percent for construction and specialty trade construction).
  • The protégé must perform at least 40 percent of the work performed by the joint venture partners, including the affiliates of the non-small business partner through subcontracts at any tier.
  • The protégé must perform more than administrative and ministerial tasks.
  • The joint venture must establish a special bank account.
  • The joint venture agreement must itemize all major equipment, facilities and other resources to be furnished by each party.
  • The joint venture agreement must specify the responsibilities of the parties with respect to contract negotiation, source of labor and contract performance.
  • The joint venture agreement must provide that each partner will ensure performance of the contract if the other member withdraws or fails to perform.
  • Each party to the joint venture will be required to sign a "certificate of compliance" attesting to compliance with the provisions of the joint venture agreement and that the parties will perform in compliance with the performance of work requirements. The certificate must be provided by the protégé to both the SBA and contracting officer prior to performance of any set-aside contract.
  • Each joint venture party must allow the SBA, including the SBA's Office of Inspector General, "to inspect and copy all records and documents."

The final rule also provides that agencies must consider the past performance of each joint venture party when evaluating a proposal from the joint venture. In addition, the SBA notes that it may consider suspension and debarment of either joint venture partner for noncompliance with the joint venture agreement, including with the performance of work requirements, failure to submit a certification and failure to provide records as requested.

The final rule does not require the SBA to formally approve the written joint venture agreement between a mentor and protégé for a non-8(a) joint venture prior to award of the particular contract being pursued. Instead, as with any set-aside contract, the joint venture must self-certify its size and status, and that certification will be subject to review by the SBA in a formal size or status protest. This distinguishes the new program from the current 8(a) program, which requires SBA district office approval of a written joint venture agreement prior to the award of an 8(a) contract.

Not requiring prior approval should be welcome news for potential joint venture partners under the new program, as the pre-award approval requirement for 8(a) joint ventures has led to confusion among contractors and contracting officers alike, and has even caused otherwise successful joint venture offerors to lose awards. See, for example, the case of Alutiiq-Banner Joint Venture, B-412952 etc. (July 15, 2016), where the Government Accountability Office (GAO) ruled that an agency improperly awarded an 8(a) set-aside contract to a joint venture that had not submitted an addendum to its joint venture agreement for approval by the SBA prior to the contract award.

Lastly, like the proposed rule, the final rule provides that to claim the exception from affiliation for joint ventures, the joint venture may not be populated with individuals intended to perform contracts awarded to the joint venture. This is a change from the size and 8(a) joint venture regulations, which allowed a separate legal entity joint venture to be unpopulated, to be populated with administrative personnel only or to be populated with its own separate employees who are intended to perform contracts awarded to the joint venture. In the preamble, the SBA expressed concern that allowing populated joint ventures between a mentor and protégé would not ensure that the protégé firm and its employees benefit by developing new expertise, experience and past performance. In an unpopulated joint venture, the member companies are similar to subcontractors and perform the contract with their own personnel. Thus, going forward, small business joint ventures must be unpopulated or populated only with administrative personnel.

Conclusion

The final rule is likely to be a "game-changing" event in the increasingly competitive market for small business set-aside contracts. The rule expands the pool of potential protégé firms by orders of magnitude, and thereby enables more large businesses to participate in mentor-protégé joint ventures that qualify for set-aside contracts.

For more information on the 2010 Jobs Act and the 2013 NDAA, see Holland & Knight's December 2013 article, The Small Business Jobs Act of 2010 Creates Opportunities and Presents New Challenges, and Holland & Knight's February 2013 Government Contracts Blog post, National Defense Authorization Act of 2013 Includes Significant Small Business-Related Provisions. For additional background on the proposed rule, see Holland & Knight's alert, SBA Proposed Rule Outlines New Mentor-Protégé Program for All Small Businesses, published Feb. 9, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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